ATM :: Five risks to India’s markets rally

By Bloomberg | 31 Jan, 2015, 02.22AM IST | Economic Times
There are times in financial-market rallies where the gains become so spectacular and the euphoria reaches such a pitch that it becomes easy to forget about the risks. A look at five of the biggest of them — all of which are capable of halting, or at least slowing, the market rally.
Five risks to India’s markets rally
Oil Rebounds

India, which imports 80% of its oil, has just begun to reap the benefits of cheaper oil prices: a comfortable current account position, moderating inflation, and better growth prospects. A swift reversal could undo those gains.

US Interest Rates Jump

A bigger-than-expected increase in the Fed’s benchmark rate makes Indian government debt less attractive. It also damps the 3.4% carry return to those who borrow in dollars and invest in rupees, the highest this year among Asian currencies.

Forex Reserves Prove Insufficient

India’s forex reserves pile, though sufficient for nine months of imports, may not be enough to support the currency and meet liabilities. In eight months, the RBI will need to pay back $30 billion borrowed from banks at discounted rates when the rupee was falling in 2013. Before then, the government and commercial lenders also need to repay about $86 billion worth of foreign debt. Also, Indian companies are borrowing more in dollars to take advantage of cheaper overseas funding costs, at the risk of being stuck with higher debt-servicing costs if the rupee weakens.

Remittances Fall

Migrant laborers working overseas in oil-producing countries risk losing their jobs as growth slows in those nations, which could translate into lower remittances. India probably got $71 billion in remittances in 2014, the highest among 143 countries tracked by the World Bank. Of that, 37% came from the six Gulf Cooperation Council states.

Religious, Border Disputes

Besides the ever present risk of conflict with Pakistan, violence among the country’s religious groups is a more likely threat to the market rally. Already the opposition has blocked key economic bills over demands that his party address reports of forced conversions of religious minorities. Further incidents of religious strife could undermine Modi’s efforts to overhaul the economy.

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